Life Insurance tax?

MoneySaverNeil

A pensioner receives approx £28,000 per year in pension payments. Her husband died earlier this year, and probate has just been completed.

Apparently they had a joint Life Insurance policy, and the company says she can have a £24,000 payment if she wants it. The money would be useful now, but she's concerned if this payout would be taxed, and she'd maybe lose 40% on some of it ?

Can anyone explain how this would work?

Aretnap

There is generally no tax to pay on insurance payouts.

In some circumstances a life insurance policy can be set up so that the payment is made to the estate of the deceased, and so it can become subject to inheritence tax when it is paid to his heirs. However (1) this is only an issue if you are rich enough to be subject to inheritence tax (most people are not), (2) bequests to a spouse are exempt from IHT anyway and (3) a joint policy would usually be set up so that the payment would be to the surviving partner rather than to the estate of the deceased one. So no IHT for a number of reasons.

This assumes that it's a reasonably modern life insurance policy. Some old style life insurance policies had elements of both an investment product and an insurance product, so the tax situation for them might be more complicated.

lisyloo

Life insurance is usually paid tax free.

I would suggest she asks the insurance company who should be very familiar with the question and answer.

There is no inheritance tax between spouses if it went via his estate (but you appear to be referring to income tax).

MoneySaverNeil

Yes, payment would be to his surviving spouse. So looks like no IHT, although I think they below threshold . Hopefully no income tax either...

Weighty1

MoneySaverNeil wrote: »

Yes, payment would be to his surviving spouse. So looks like no IHT, although I think they below threshold . Hopefully no income tax either...

DEFINITELY no income tax.

sal_III

Almost guaranteed to be not taxable income, but it's worth checking with the insurance company or at least look at the policy documents. The payout seems oddly small for "modern" life insurance and some old insurance policies are weird.

ACG

The premiums paid are taxed, it would be a bit harsh for the government to then also tax a payout.

If the person is in receipt of any benefits, it may affect those having £20k + in savings.